At a time when commercial finance bigwigs are faltering from taking hit after hit from the credit crunch, even a usual stalwart like General Electric Co (GE) hasn’t emerged unscathed.
Known for its reliability in delivering consistent earnings growth, GE, whose financial services divisions contributed over a third of GC’s global revenues of $173bn last year, stunned the market recently when it reported a decline in first quarter results.
Admitting that it failed to meet expectations, CEO Jeff Immelt said that the group results’ primary shortfall was a “decline in financial services earnings”. Notably, Immelt said the disruption in the capital markets affected its ability to complete asset sales and resulted in impairment charges to the profit and loss account.
Compounded by a deterioration in outlook for the US economy, its stock price has suffered tremendously, falling to a new 52-week low of $26.51 on June 26, or down 38 per cent from its 52-week high.
In spite of all its woes and the increasing pressure from investors to break up the business, GE remains single-minded in its aim to be, as its famous maxim says, “the number one or number two in every market that it operates in”.
This is at least evident in the series of acquisitions it has made in Europe in recent years.
In May, GE Commercial Finance’s (GECF) Business Finance unit acquired Five Arrows Commercial Finance Ltd from NM Rothschild & Sons for an undisclosed sum. Five Arrows is one of the top 10 providers of invoice discounting, factoring and asset-based lending solutions to small and midmarket businesses in the UK.
This adds to its growing stable of acquisitions, filled in the last three years by ANZ Custom Fleet, Disko Leasing and ASL which it acquired from KG Allgemeine Leasing, and Banque Artesia Nederland which it bought from Dexia. More recently, it entered into a non-binding agreement with Santander to acquire Interbanca, a move which GE said will enhance capabilities in serving the mid- market businesses in Italy. The deal is pending regulatory approval.
With liquidity in financial markets extraordinarily tight at the moment and with high street lenders pulling back on lending, asset-based lending is expected to plug the funding gap for SMEs in need of working capital. GE’s move to expand into this area appears well-timed.
But it is unclear what lead GECF in the asset-based lending market will gain from the Five Arrows buy.
Last year, the market for asset-based lending reported sales of £192m, advances against debt of £16m and over 48,000 customers in the UK, according to figures from the Asset Based Lending and Factoring Association.
GECF in a written response said: “As the UK’s leading non-bank owned invoice discounting and asset based lending provider, GE has ambitions to significantly grow its presence in the SME and mid market space.”
The purchase did not include acquisition of the brand name, Five Arrows, GE added. It will however, work on swiftly integrating the operations with the GECF Business Finance operations.
Indeed, the question of effective integration arises, post-acquisition.
“We don’t anticipate the integration process taking a very long time, but the overriding goal is to ensure it’s done effectively and without negative impact on customers,” GE said.
While customers probably won’t be affected much by the transition, those familiar with GE’s operations point out that the conglomerate doesn’t have a smashing record in retaining employees, although one might expect any merger deal to incorporate some temporary handcuffs on key personnel.
“What usually happens is the existing management end up leaving and they usually go to a competitor or start up on their own, and they usually take a lot of the business and the relationships with them,” says a former GE employee, recalling how its purchase of a few leasing companies in the Nordics some years back ended with most of the key staff leaving to start businesses within the same market.
“They were operating in the same market, in the same niche against GE, just managing their own relationships that GE thought it had bought.”
Insofar as creating value in investments is concerned, GE observers are unable to measure that success since performance is only reported at a group consolidated level. In asset finance and leasing, GECF’s growth could be measured in terms of the volume of businesses written over time. Sceptics suggest that GE has probably had to continue buying competitors to compensate for shortfalls in targets.
GE’s key performance indicator for investments is a 10 per cent earnings growth for “most years” and a return on equity of 20 per cent over the long-term. When asked if Disko and AG had met these benchmarks so far, GE would only say that each acquisition was based on individual merits.
Whether GE can increase volumes at its leasing and asset finance units depends on how aggressive it wants to be in hunting down sales, observers note.
“Although it’s not a buyers market at the moment in terms of capital, there are plenty of lenders out there who are still looking for business at return requirements that are lower than GE’s,” says one.
To its credit, nonetheless, GE is known for being particularly choosey about who it lends to, a habit which encouragingly, hedges itself against exposure to bad credits.
As much as GE is expected to be on the look out for strategic assets to acquire, it could just as quickly exit underperforming ones.
And unlike other non-bank financial groups, such as CIT, which are struggling to cope with dwindling capital and credit ratings, GE probably will not have much difficulty in raising capital to fund these strategies. It still maintains an untarnished triple-A credit rating, thanks in part to its well-heeled industrial businesses.